This week brought a full reopening of European leveraged finance markets after the late-summer break, even if the pace of issuance across loans, bonds and CLOs has so far been subdued. Activity is certain to quicken rapidly in the coming month though, amid what looks to be both optimal financing conditions and a bulging pipeline of M&A-linked deals.
Indeed, after a summer of corporate and private equity deal-making, new issuance was perhaps surprisingly sedate this week. “The first week of September is like the first week of January, in that it can be busy just as much as it can be quiet,” said a banker. Sources also note that a late Labor Day holiday in the U.S. coinciding with Jewish New Year celebrations did not help the prospects for an early start to the new issuance season.
The market is certainly open and operating, however. In European leveraged loans, six bank meetings have so far been announced — including the first jumbo deal of the season, from specialty chemical group Solenis LLC which went out on Sept. 7 with a cross-border bond and loan financing supporting its buyout at the hands of Platinum Equity and merger with Sigura Water.
This deal was presented on an investor call on Sept. 9, and will also bring the first mainstream European high-yield bond offering of the month. Sources note that bonds tend to follow a certain pattern after the traditional August break, with financial institutions and investment-grade names leading the return, followed by strong-rated industrials and then the lower-rated credits. On Sept. 6, Cellnex Telecom SA reopened the space for double-Bs when the BB+/BBB- rated wireless infrastructure company blasted through the market with a €1.85 billion, two-part benchmark offering that priced tighter than initial talk.
These deals are just a taster of what's to come, bankers agree. “We're on course to break issuance records,” said one underwriter at a large European bank. In the first instance, sources note that the launch calendar is just one part of the new-issue story, and investors say they are busy with pre-marketing for transactions across bonds and loans. These deals include some long-standing calendar fixtures, such as the financing supporting Spanish telco MásMóvil Ibercom SA's acquisition of domestic rival Euskaltel, according to market sources, and the syndication revival of the €1.6 billion term loan supporting Platinum Equity's buyout of Urbaser, sources add.
Beyond these situations, the volume of LCD's forward loan calendar stands at €16.42 billion (as of Sept. 6), although this figure understates the likely supply given it only includes transactions known to be mandated and readying for launch. J.P. Morgan, for example, went on the record in an interview with Bloomberg ahead of its Leveraged Finance conference this week to put its European pipeline across high-yield bonds and loans at 45 deals to come in September and October, of which roughly a third are underwritten.
For their part, market sources suggest issuance volume of up to €40 billion across bonds and loans could emerge in Europe before year-end. This figure is before any opportunistic trades that may appear and could seem ambitious, although it doesn’t take long to quantify when taking into account jumbo deals such as the take-private of British supermarket Wm Morrison Supermarkets PLC that is set to bring a £5 billion financing package.
There was no let-up in acquisition activity over the summer either, and August brought news of deals such as Faurecia SE's €6.7 billion cash-and-share takeover of German car-parts rival Hella in a deal backed by a €4.7 billion debt financing. The telecom sector is due to be busy too, and Iliad is said to be talking to investors about the refinancing of an up to €3.6 billion bridge loan supporting Xavier Niel’s take-private of the company. BNP Paribas, Credit Agricole CIB, J.P. Morgan and Societe Generale are leading the deal, which will be taken out through high-yield issuance. Further bond supply, meanwhile, is expected to support BC Partners-backed United Group's acquisition of Greek mobile group Wind Hellas.
Deal-making has continued into September, bringing news of big-ticket buyouts such as Advent's SEK69.4 billion take-private of Swedish rare-disease pharma group Sobi, and Apax and Warburg Pincus' €5.1 billion buyout of T-Mobile Netherlands from Deutsche Telekom. Also this week, London-listed gaming firm 888 Holdings confirmed it is in advanced talks to buy the European operations of William Hill in a deal estimated to be valued at more than £2 billion.
The scale of this likely supply raises a question over financing capacity. In loans, the end of the summer brought clear symptoms of market indigestion, and accounts maintain that they remain choosy. “It's about what we're going to focus on,” said one manager, addressing this heavy supply. “In a busy market there will be deals that fall by the wayside, and you will see some market casualties in September.”
The CLO market, meanwhile, hardly paused for breath over the summer, coming off the back of a record-breaking August for CLO issuance on both sides of the Pond (note, the CLO market is the predominant investor segment in European leveraged loans). This activity should help put the leveraged finance markets back into a more comfortable equilibrium after a few months during which new loan issuance outweighed CLO pricings. In terms of new CLOs, Europe hosted €1.58 billion of new-issue volume in August from four deals, with further resets or refinancings also clearing the market.
This deal flow came despite a prevailing tougher market for triple-A notes, which shows little sign of easing any time soon. The first pricing of the month, for example — from Sound Point on Sept. 3 — brought a triple-A spread of 102 basis points, which is likely to set the tone for the coming month.
That dynamic may pressure loan spreads once the market gets going, although arrangers are confident this will not be enough to put off sponsors if it keeps liquidity flowing. “An extra 50 bps or so is not enough to affect meaningfully the IRR [internal rate of return] for a buyout,” said one banker, adding that margins could well settle toward E+400 for a decent single-B name. The weight of supply had already seen margins tick up in the run up to the summer.
Sponsors' willingness to work with higher margins should also help keep the CLO market active, and participants are braced for a busy September and October here as well — albeit not to the extent seen at the beginning of the year. Higher triple-A spreads may also tempt new investors back to the market, with bank treasuries tipped to return if triple-A pricing goes above 105 bps.
A rise in loan margins would also open a wider chasm when compared with yields on offer in the bond market. Here, there was little sign of indigestion in the pre-August market, with inflows to the asset class reported through the remainder of summer. “There is a realisation that policy support is not going to be withdrawn suddenly, and this continues to drive the search for yield,” said one banker. Indeed, such is the demand for paper that yields on euro-denominated high-yield bonds turned negative for the first time last week, according to research published by BofA Securities on Sept. 3. The bank notes that almost 50% of investment-grade credits are yielding below zero, as are a growing number of high-yield bonds. Investors therefore have "little choice but to keep reaching for returns,” the report notes.
As such, sources note there is increasingly little interest from traditional high-yield accounts for double-B or crossover names such as Cellnex. “Double-B credits are priced to perfection, leaving their performance tied to rates,” one account said. Instead, bankers say feedback from more typical high-yield accounts suggests solid demand for single-B and triple-C risk, especially for event-linked M&A or buyout deals. The corollary from this may mean that conditions become tougher for so-called reopening trades, but it does provide optionality for sponsors looking to fund big-ticket buyouts. “Like-for-like a bond may well price inside a loan today, but sponsors are always going to be willing to pay for the call flexibility that they get from a loan,” one banker said, adding that he expected to see more sponsors layer-in secured tranches alongside a term loan as well unsecured tranches.
For a sponsor, these are not unpleasant conversations to have — and bankers and investors are in agreement that financing conditions for the autumn are as close to optimal as they can be. “At the moment it's hard to see the downside to the rest of the year,” said one banker, noting that even inflation has retreated as a concern for many investors. “The only worry is that we have been in this situation before, and something unexpected always turns up,” he added.